Back to the (Cleantech) Future

When we launched Congruent Ventures at the end of 2016, we aimed to reignite the slowly recovering sustainability investment sector. This space, historically called cleantech, is unlike the general technology venture space and calls for a different approach; one that we’ve put to practice across 27 companies.

The big trends driving the need for investment in the sector haven’t changed much from a decade ago when investment in sustainability startups started. Atmospheric CO2 is now over 400ppm, global arable land continues to shrink, average global temperatures continue their upward trend, and the rise of the middle class in developing regions puts ever increasing demands on the food supply chain, transportation, and energy infrastructure. This is the first year in human history in which more people will live in urban centers than rural areas. While these are huge challenges, they also present huge investment opportunities. The market for companies addressing these challenges is bigger than IT, healthcare, and media combined!

During the runup in cleantech investing up prior to 2008, there was a f

lood of capital into this area but investors in the space were new to the area. While there were some small pockets of deep sector expertise, most investors that rushed in came from general tech investing backgrounds and hadn’t yet developed an appreciation for the challenges of the pace of energy markets, the challenges of scaling industrial bio-chem processes, or the challenges of competing in the commodity solar market against sovereign subsidized competitors. Many investors’ tech-inspired reflexes backfired and the cleantech venture industry dramatically retrenched with limited partners pulling back in the face of losses and investors returning to mainstream tech or leaving the investment space altogether.

Venture is a naturally cyclic industry, but it has yet to fully recover from the post-2008 downturn at least in cleantech, but there are promising signs of life. We formed Congruent to lead and catalyze investment in no-compromise companies that have amazing returns potential as a contrarian strategy to general venture capital strategies of a few years ago.

A lot about this sector hasn’t changed, but a lot has. Since the cleantech bubble burst, an ecosystem has grown up in many verticals in much the same way as the foundry model transformed the semiconductor industry in the late 80’s and early 90s or the way Amazon Web Services transformed online and SaaS businesses in the late 2000’s. Several government agencies from the DOE to the USDA have invested in industrial user facilities including advanced bio-chemistry pilot-scale plants at LBL and NREL, the Solar Zone at the University of Arizona, the Freedm utility test bed at NC State, and massive agricultural test assets at the Danforth Plant Science Center. These facilities are shared across startups and academia and dramatically reduce the capital intensity necessary to test new tech and scale early concepts.

One of the criticisms of Cleantech 1.0 was its perceived capital intensity. We reviewed a lot of data around the difference in capital required for success in cleantech vs. general tech and found them to be similar! The big difference that was unappreciated by the venture community a decade ago was that the venture model isn’t good for everything in sustainability. In general tech companies, early product risk is retired early in the investment cycle with the preponderance of investment dollars (hopefully) funding growth and customer acquisition with a clear path to overall profitability. With many startups in the sustainability space, it’s difficult to know whether a tech will truly be economic at scale without a full build out — thus putting a lot of investment at binary risk. The canonical example of an equity-built $150M biochem plant running in R&D mode for years with the associated cash burn is awful for venture returns. This is a space we’ve been conscientious of avoiding, preferring teams that have figured out how to retire risk in a granular way as they raise additional capital, thus ensuring reasonable returns for early investors like us as well as risk reduced opportunities for growth stage investors. It’s win-win to be strategic about focusing on companies for which venture is the ideal funding strategy.

While much has changed in the ecosystem, much remains the same. The cleantech and sustainability space is different from the general tech space in most regards. Development cycles tend to be longer; adoption cycles tend to be much longer, and acquisitions are generally made on the basis of fundamentals rather than momentum and land grabs. The sectors we focus on — energy, food/ag, industrial, and smart cities — are all deeply nuanced and for a new investor who has not had the benefit of continuous involvement is likely going to replicate many mistakes from the cleantech bubble. These range from under appreciation of channel strategy to ignoring long term commodity pricing trends and relying on these trends never returning to the mean. As more investors warm to the sustainability space again, we’re seeing companies funded that are carbon copies of those that failed a decade ago. Legacy knowledge is critical — history repeats itself when memories are short.

Like most venture investors, we at Congruent are financially motivated — we see this sector as underserved and driven by long term macro trends unlikely to be affected by the inevitable economic cycles. Efficiency, lower cost energy, better supply chains all save money and are investable even during a downturn. While financially motivated, most sustainability focused funds like Congruent have a solid dose of mission alignment and want to collaborate rather than to compete to effect global change. We can’t do that without partners. We have been trailblazing over the last four years since standing up our fund in the face of venture and LP headwinds but have carved out a path that has been paying dividends. We’ve led two thirds of the deals we’ve done and actively worked to syndicate them amongst the general tech community, in part to prove that there are solid returns in this sector. It’s heartening to see top tier funds like Sequoia Capital, Union Square Ventures, and Data Collective VC leading our last three follow-on investments, but we need to bring more capital and expertise into the fold.

The opportunities across the sustainability landscape we focus on are bigger than healthcare and general tech and we warmly welcome those tentatively reentering the area and those jumping in with both feet. We love to collaborate and look forward to watching the trough of disillusionment disappear in the rearview mirror as we race up the slope of enlightenment.

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